Arena Pharmaceuticals (ARNA) is not currently sitting where most investors a year ago imagined it would be. In the summer of 2012 the company was riding high with a recent FDA approval of the anti-obesity drug Belviq, and only needed finalized DEA scheduling to bring its drug to market. The DEA process dragged on for months, and it was not until June of 2013 when Belviq became available.
Arena Pharmaceuticals is not where investors thought it would be almost 3 months after launch either. While I was chastised for "low-balling" when I said that 40,000 scripts in 3 months would be a good start, it turns out that the 40,000 script level is exactly what we are on pace for.
Arena Pharmaceuticals is not even where I, a person that tends to look at things with a more conservative eye, thought it would be. I anticipated a nice base of about $8.50 at launch and for the sales of prescriptions to allow upward momentum from there. As it turns out, even my more conservative outlook was not conservative enough.
So why is it that Arena investors are now knocking on the proverbial door of a 52 week low? More importantly, is the current pricing level a good entry point?
My opinion is that sales of prescription anti-obesity drugs are coming in at a much slower pace than many anticipated. Competitor Vivus (VVUS) has had its drug, Qsymia, on the market for almost a year and just recently was able to bring in a weekly sales figure of 10,000 prescriptions sold according to IMS. Arena has had more volume in its launch, but as yet, 10 weeks in, has not cracked the 4,000 level. Sales have been steady but slow.
The more problematic issue with Vivus and Arena is not slower than anticipated sales, but rather lower than modeled revenue. Arena and Vivus have both been forced into discounting their respective products to gain traction, and even at that, it is not like consumers are lining up outside the doctor's office to get a prescription. Consumer acceptance is going to be slow going, and until insurers in larger numbers open up these drugs for coverage it is going to remain a slow growth prospect.
Betting on the anti-obesity space will remain a roller coaster until doctors have more comfort with the drug, patients realize that it is available, and the organic word of mouth success stories begin to unfold. There is still uncertainty in the space, but make no mistake, there is potential as well. After all, there are some 100 million obese people in the U.S. alone.
In my opinion Arena is currently a buy for investors willing to have some patience and absorb the risk. While the concept of treating obesity seems like a no-brainer, getting people that need treatment to understand the benefits seems to be a task that is not quickly being adopted. This is where direct to consumer advertising can make a substantial difference. If advertising is combined with getting insurance coverage from the current 35% of covered lives to 50% of covered lives, the impact can be swift and fast moving for those invested. The issue was getting expectations to realistic levels and then building from there.
Not long before Belviq launched, Arena partner Eisai made statements about sales being $200 million by March 31st of 2014. Subsequent to that Eisai U.S. made statements about $150 million in sales. Whether that was referring to the end of 2013 or by March 31st of 2014 is the subject of debate, but either way, the numbers have now been called "hopeful aspirations" by Eisai. As disheartening as the "hopeful aspirations statement may have been for Arena investors, it was likely the most healthy thing that could have happened. It finally got the street and investors to think in terms that were more realistic.
Before moving on, I want to visit the $150 million figure again. We have determined that gross sales are arrived at by Eisai selling Belviq to wholesalers at a price point of $199.50 per bottle. What that translates to is nearly 752,000 bottles sold. The launch supply was 50,000 bottles that gave a gross revenue figure of $10 million. That would mean that another 700,000 bottles would still need to be sold to wholesalers. Currently that would mean 100,000 bottles a month would need to be sold if you are targeting March 31st of next year, and 175,000 a month if you are targeting the end of the year. In my estimation the initial 50,000 bottles will be exhausted at about week 14 after launch. As you can see, the likelihood of these types of numbers being ordered is not very high. That is fine, because we want to get away from hope and more toward reality.
Realistically speaking we are looking at gross sales of between $60 and $70 million by the end of the year. Arena gets paid 31.5% of net sales. Early numbers indicate that the net sales figure for 1 bottle of Belviq is about $82. This would imply that Arena would get about $26 per bottle sold to the end user. If we assume that as time passes the net average appreciates, we can arrive at a more bullish $100 per bottle. This would imply Arena revenue of about $32 per bottle.
If Arena can get to $10 million in the split for 2013, the first hurdle toward brighter days can be cleared. In Q2 the company received $1.3 million in revenue from Belviq. In my opinion this is a key element in establishing a base price from which equity price appreciation can build.
Is Arena a buy at current levels? My answer is a yes, depending on your timeline and risk tolerance. As each week passes we are beginning to establish with a greater degree of certainty that there can indeed be enough gross sales in 2013 to get Arena in the neighborhood of $10 million in Belviq revenue. That is the starting point.
What adds value to Arena? The pipeline. Arena announced today that the company has completed phase 1b clinical trials for its APD811 hypertension drug. Advances in pipeline bring about more and more potential for a company like Arena. While this progress adds value, the Arena story is currently hitched to Belviq success in the market. The street is focused on Belviq. Pipeline potential is not yet built into the price. Savvy investors with patience can potentially see a nice reward from what Arena offers in the pipeline. Stay Tuned!
Additional disclosure: I have no position in Vivus